Financial Problems All Small Businesses Face
Even though there may be a lot of potential in business start-ups, companies usually start small. However, almost 50% of small businesses fail within five years of commencement and quite a few companies finally grow to be prominent and influential. There are two particular obstacles in accomplishing success with small businesses – surviving in the marketplace and ensuring sustained growth. These hurdles lead to failure which is driven by different types of challenges – i.e. financial, managerial, operational, situational, etc. Successfully facing financial challenges is considered as the most difficult obstacle for the small businesses because financial problems always act as the silent assassin. As we know, knowledge is the power that limits the odds and helps to sustain, so let me help you with the critical economic challenges that small businesses face.
Lack of Capital
The first and foremost financial problem that today’s small businesses face is the lack of sufficient capital. In this era of multi – faceted fundraising opportunities, being unable to collect enough money may seem unrealistic on the first glance. But here’s the fact – being ‘small’ is a problem here; as small businesses are usually not much acquainted to the prospective capital suppliers. They can’t go through the extravagant procedures of raising money from the public (equity funding) either. Lack of collateral and credit rating create further difficulties in acquiring debt capital for small businesses. Even, if they do acquire some funding through a bank loan or another debt featured sources, the burden of interest payment reduces the financial capability of the firm significantly.
Small business owners often resort to bootstrapping (raising funds from their personal sources) which tends to be inadequate. The result is an immediate failure or slight real growth that also eventually leads to the inevitable collapse of the company.
Inadequate Cash Flow
Here comes the problem of inadequate cash flow. For all types of businesses, ensuring a smooth day to day operation is a crucial factor for surviving in the marketplace. Now, efficient operation requires adequate and stable cash flow. In general, there’s a perception that profit is the most important concern for businesses; thus more important than cash flow. Well, face the fact – it’s not. Profit is the logical consequence of service/goods provided to the customers, and while doing that – steady cash flow is a prerequisite. Also, the volume of transactions in case of small businesses is quite small. The risk of cash flow disruption is almost imminent as incidents like the late collection of receivables, bad debts, etc. may create a situation where the firm may face a severe deficiency of cash on hand. It can lead to failure to pay out for the short – run obligations. The ultimate result is the decreasing market reputation and in extreme cases, bankruptcy.
Ineffective Cost Management
Strict cost control is essential for small businesses. In fact, an integrated budgetary planning that’ll cover all phases of the probable cost is very much significant. In most of the cases, small business owners don’t have that much time, energy or concentration for managing the cost outlays efficiently. The result is the waste of a huge pile of money in non-productive, unnecessary activities. Any situation gets worsened due to the inseparable feature that puts business and owner into the same entity. Due to this feature owners can easily take business money for personal expenditure and gradually lose the hold on the business operations.
Inefficient Financial Management
There are different facets of inefficient financial management and for all of these, the intense pressure on business owner’s shoulder is mostly liable. The owner himself has to manage and maintain all the spheres of his business, and that’s really tiresome – sometimes even out of his capability. Let’s have a comprehensive view here -
First, the owner may fail to understand the actual situation of his business and get involves with the wrong type of the funding procedure, leading to ineffective capitalization. Second, the company may invest in some irrelevant and irrational sectors which will hamper the long run prospects of the business. Third, the wrong decision regarding the optimum balance of equity and debt financing (leveraging) will directly bring havoc to the firm’s financial position. Finally, managing asset/liability inefficiently will lead to ultimate destruction of the business.
Weak Credit Management
Here’s another challenge that small businesses face during operation. Usually, these firms don’t have a specialized personnel for credit management which results in inefficient use of borrowed fund. Now, when a company needs perfect utilization of every bit of its fund, inefficient use of credit can only lead to a catastrophe. For instance, the company may miss a significant opportunity to grow or even worse, it may lose the mere capability to sustain in the marketplace.
Wrong Pricing Decision
Incorrect pricing of products/services may also lead to financial problems as no business can ever survive with less than required profit. The problem initiates with miscalculation of the break-even point which starts a cycle of unrealistic pricing, lower revenue, failure in covering cost outlays, inadequate profit and perhaps, loss. Small businesses are the instant victim of wrong pricing because they don’t have the financial strength to recover. They also lack the advantage of a diversified product line that large companies can use for balancing the pricing schedule.
Small businesses usually don’t face double taxation. Personal taxation is applicable on before - tax profit of the company, on a percentage basis. However, in some cases, a personal tax also becomes a burden to the business, thanks to the weak financial condition and lack of visionary, long-term financial planning.
US economy is still suffering from the aftermaths of global economic crisis and Eurozone debt crisis. Projections say that the economy is recovering in a discouraging rate (only 2% GDP growth in 2014 – according to IMF). For small businesses, the economic boom works as a key booster which helps them to grow quickly for sustaining in the marketplace for the long run. So, facing a sluggish economy is depressing for small businesses – making it tougher for them to manage the financials effectively.
The financial problems that illustrated above are quite substantial, and the small business owners should be well aware of these. It’s always the best approach to get prepared for what’s coming next. And to be precise, these financial problems are much common in real life scenario, causing a rapid shutdown of a small business. So, face the challenges boldly with the armors and weapons of knowledge. It’s time to turn the odds even!
© 2014 Mae Merriweather aka Boss Lady Mae